Semel Out, Yang In, Still Waiting For the Real Change At Yahoo

Brian Bolan, research analyst at Jackson Securities, sent a note to clients following Yahoo's (YHOO) latest earnings report in which he maintained his recommendation they sell their shares in the company.

Valuation and Recommendation: Following speculation of a buyout from Microsoft (MSFT), we lowered our rating to Sell from hold. Within weeks, Yahoo! CEO Terry Semel announced his resignation and the appointment of Co-founder Jerry Yang as CEO. On his first earnings call, Yang did little to shore up the concerns we have about the direction of the company. His 100 day plan to develop a plan leads us to believe the stock will trade through our target price in the coming months. We maintain our sell rating.

Earnings
Yahoo! reported revenues of $1.243B and earnings of $0.11 per share. This was roughly inline with our expectations of revenues of $1.255B and $0.11 on the bottom line. In the middle of the quarter the company notified Wall Street that they would come in at the middle to bottom end of the expected range.

We note that management has decided to change the way revenues are reported. We have adapted the numbers to reflect the how the market would have viewed the 2Q07 numbers. In the future we will adjust our model to provide a better apples to apples comparison.

Semel Out, Yang In, still waiting for the real change to come
On the conference call, Jerry Yang noted that he and the management team will spend the next 100 days to map out a strategy for success. After only being on board as CEO for the last month or so, we see why Mr. Yang needs another 100 days. Investors, however, will point to the fact that Mr. Yang has been associated with the company in the role of Chief Yahoo! for more than the last 12 years. Once again, we see this as Yahoo! being Yahoo! and working at their own timetable. Wall Street will likely have harsh reactions to the idea of having to wait another 100 days to hear what the plan will be.

Mr. Yang did give us some hints as to where he sees the company heading, but nothing that would give us much hope. Moving quickly and finding your own path are certainly cornerstones to success, but in internet time (yes, a phrase few have spoken since 1999) 100 days is too slow. Its 100 days for Google to increase the gap it now enjoys over Yahoo!. Its 100 days Microsoft has to narrow the gap between their online properties (including the newly acquired aQuantive property). In short its 100 days that investors may not want to own the stock.

The outline that Mr. Yang delivered has four key elements. The first being to focus on areas of greater growth and profitability. Second is an emphasis on technology to create platforms that can easily scale with use. Faster decision making and better execution was third. Finally, a new and improved culture of winning for Yahoo! rounded out the temporary keys to success at Yahoo!. We like what we heard from this outline, but with no meat on the bone, its still just a skeleton.

Where they can do better, organizational structure and areas of strength – new conference call bullet points
Mrs. Decker stated that there will be three areas she will address in future conference calls. The first segment, areas of improvement basically highlights past failures and notes that lessons have been learned. In the inaugural installment of this new feature, Mrs. Decker stated that Overture was allowed to operate as a stand alone business. Its integration (years later) has allowed for improvements such as Panama. The feature also noted that the company has failed to drive innovation for customers, and as a result has seen customers move on and faces inventory challenges on the low end.

The second segment addressed the organizational structure of the company. The December 2006 re-org was highlighted and the subsequent management changes were also addressed. The changes in human resources were categorized as “regrettable, yet necessary” as the company strives to move forward.

Finally, areas of strength were mentioned. One doesn’t have to look to hard to find the clear cut gem of the quarter, RPS (Revenue Per Search). RPS increased 15-20% in the quarter as Panama showed that it may even be worth the wait. Future RPS increases are almost a certainty given that Panama is still in the process of being rolled out world wide. Without a doubt, this was the strongest point made on the call.

SmartAds
SmartAds are advertisements that rely on the depth of knowledge that Yahoo has on its users. A tool that only recently has been released, SmartAds are a source of high expectations from management. Currently, SmartAds are only found in the travel section of Yahoo!. SmartAds will integrate the company's demographic, geographic and behavioral targeting capabilities with an ad construction platform that customizes ads in real time.

Reducing the load, building for the future
CEO Jerry Yang noted during the conference call that management would be looking to close down segments that are underperforming. This comment was closely followed by a notion that the company is still in “investment mode”. It appears as though management is saying that they will continue on their strategy of propagating verticals and expanding their presence within them. The expansion of presence could likely mean more applications developed within specific verticals.

Valuation
Prior to the release of earnings, the stock ran up above $27 a share. Following the conference call the stock slid back to $26.40. We changed our rating from Hold to Sell on May 4, 2007 at the height of the Microsoft buyout craze. At the time, the stock was trading around $32 a share. We are maintaining our target price of $26 even though we believe that the stock may trade lower than that in the coming months. The price target of $26 represents 52x multiple of this years earnings estimate.

YHOO 1-yr chart:

For more on Yahoo's latest quarter, see the company's Q2 2007 Earnings Call Transcript.